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When the bottom falls out, everybody gets burned

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The bottom fell out of the ferrous scrap market in November. It was not simply that ferrous prices plunged to levels not seen in several years; worse, the orders for scrap all but vanished as well.

The victims feeling the most pain were the independent scrap processors. Some major mills, like ArcelorMittal SA, told virtually all of them that they would take no purchased scrap from outside suppliers in both November and December.

Adding to the pain were warnings from many mini-mills that they also would not be buying any scrap—not buying from outside suppliers, that is. Most of the large mini-mills now are scrap processors as well as steelmakers, and even a few of the smaller mills have abundant in-house scrap sources to tap.

Were steelmakers shutting down? No. Mills were still producing raw steel in November, but at a reduced rate. As is usually the case in such demand downturns, mills shipped more steel from their finished goods inventories and used more home scrap and purchased scrap that had already been delivered to the mill.

What's different this time is that the industry has undergone a structural change in the past few years. Dramatic increases in scrap prices and other raw materials along with the threat of supply shortages have produced a new steel industry—one that resembles the integrated steel industry of the past. Fifty years ago or more, steel mills not only owned the means of producing steel—that is, the furnaces and rolling mills—but also the raw materials like iron ore and coal.

Some steelmakers, like Commercial Metals Co., Irving, Texas, have owned both scrapyards and steel mills for decades. Others, like Steel Dynamics Inc., Fort Wayne, Ind., and Nucor Corp., Charlotte, N.C., have been on an acquisition binge in the past two years, buying up some of the largest scrap companies in the country. Those steel-owned scrap divisions, in turn, have gobbled up some the largest yards near their new corporate parents' mills in an effort to ensure supply and minimize freight expenses to the mill.

That has all but closed the mills' gates to independent scrap companies—not only the small, stand-alone, family owned yards that have operated at one site in one city or town for many generations, but also the bigger publicly owned scrap players.

Steel mills were still producing steel, but much of the scrap being melted was coming from their scrap subsidiaries. This was not a slowdown for scrap suppliers—it was about as close to a collapse as has been seen in decades. Prices of iron and steel have fallen drastically, even more drastically than nonferrous scrap. From $900-a-ton prices that prevailed at mid-year for top grades of industrial steel scrap like No. 1 dealer bundles and No. 1 busheling, dealers and processors were receiving $150 a ton or less in November.

Nor is this a uniquely North American situation. Newspapers throughout the world report that scrap dealers are in dire financial straits. "This has affected us very badly," one dealer told South Africa's Cape Times. "I'm looking to reduce the number of staff I have. I have no choice."

In the United States, some processors have contacted many of their industrial suppliers to explain that they can haul away sheet clips from their plants but they have little or no idea when they will be able to pay for the scrap. In some cases, with demand as low as it is, less-desirable grades like mixed borings and turnings may be destined for a landfill and the manufacturer that generated the scrap may have to pay to have it hauled away.

Others can no longer pay much for the smaller truckloads of scrap they take in from tradesmen and smaller scrap dealers. Even the dirt-poor scrap peddlers that push shopping carts filled with old pipe and cans into inner-city yards are apt to wonder whether even that work is worth such a minimal reward. Owners and managers at small yards said they have had little choice but to shut their doors temporarily or cut the hours at the scale until they see mills return to buy some scrap.

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